Reserve Bank keeps rate stable, for now
When will the Reserve Bank start to hike interest rates? Its comments after this week's monetary policy committee have added to a fever of debate about when, and even whether, it will increase, and by how much, especially given the uncertainty over what the recent unrest might do to the economic outlook.And governor Lesetja Kganyago again fuelled debate about where interest rates might be headed over the medium to longer term by reiterating his view that SA's inflation target should be reduced. He added that this would likely be addressed as part of a macroeconomic review under way in the government - and even hinted at a number, saying that many advanced countries had reviewed their inflation targets and kept them at around 2%, while several emerging markets had opted for 3%. "There is no virtue in higher inflation: higher inflation begets higher interest rates," the governor emphasised.The monetary policy committee again unanimously decided to keep the benchmark repo rate unchanged at 3.5%, saying that it expected inflation to remain contained in 2021 and 2022, before rising to the 4.5% midpoint of the inflation target range in 2023. Its decision, it said, was even though inflation expectations had edged up and despite risks to the inflation outlook from global inflation and supply shortages as well as locally from petrol, electricity and other administered prices.But the Reserve Bank's quarterly projection model now predicts a first 25 basis point hike in the fourth quarter of this year, followed by similar increases in each of the four quarters of next year - a path that the Bank still says will be "highly accommodative". Market rates have been predicting an even sharper upward path over the next 18 months.But while some economists still expect a hike in November, or even as early as September, despite the damage last week's social unrest has done to the economic outlook, others still see a "lower for longer" scenario. And the monetary policy committee this week set out the conditions that could keep interest rates lower for longer, making it clear that "better anchored" inflation expectations were required - and that these could be realised by achieving a stable public debt level, increased electricity supply, more moderate inflation in administered prices, and keeping wage inflation low.It's widely expected that the Bank will have to look at raising rates at some point, as advanced countries expect to start "normalising" their monetary policy and inflation expectations rise in SA. But this week's meeting did not throw much light on it, with Kganyago emphasising that the committee, not the model, decided interest rates, based on its assessment of the risks. And while the committee has generally seemed to ignore the model's hike predictions at recent meetings, Kganyago said it wasn't necessarily ignoring the model, which predicts a fourth-quarter hike.Absa economist Peter Worthington said that nothing in the committee's statement or the subsequent Q&A warranted a change in his "lower for longer" view, which sees the first hike in interest rates only in March 2022. The Reserve Bank said this week that it would keep its growth forecast unchanged at 4.2% for this year, rather than raising because of a better-than-expected first-quarter recovery, as it had been planning to do before the unrest. Citi economist Gina Schoeman said the Bank was the first official authority to come out with a growth forecast that tried to take the unrest into account, and markets would be closely watching to see what the National Treasury would do in the medium-term budget later this year.The supply chain disruption resulting from the unrest was not as much an upside inflation risk as a downside GDP risk, said Schoeman. She has revised her growth forecast down from 4.3% to 3.7% and said she might have to revisit it again, as will other economists, because the full impact of the unrest was not yet clear. "I would be very surprised if any economist can say they know exactly what the impact is. Everyone will have to redo their GDP forecasts," Schoeman said.Also complicating the picture is the fact that Stats SA, which does a rebasing and rebenchmarking exercise on the GDP numbers every five years, is due to publish the results of the exercise next month. This is expected to see revisions to the numbers for the past five years and possibly also to the growth rates, impacting also on future GDP numbers.